Goldman Sachs Changes the Jail Industry

Goldman Sachs Changes the Jail Industry

(08/09/2012)

RIKERS ISLAND, N.Y. — As is so often the case, Goldman Sachs is on the cutting edge of an innovation that alternatively excites, fascinates and concerns people. Almost assuredly the most well known investment banking firm in the world, Goldman Sachs is legendary for being able to position itself to make a profit in the best of times or the worst of times, in terms of the world economy.

The investment firm has chosen the jail sector for its newest pilot project. New York City Mayor Michael Bloomberg recently announced Goldman Sachs would be participating in a social impact bond program at Rikers Island, with the aim of lowering recidivism among adolescent men incarcerated there.

Social impact bonds represent an uncharted frontier in the western world and have only been implemented in England, beginning in 2010. The idea of a social impact bond is that a private company, Goldman Sachs in this case, pays for a service that would normally be funded by a charity or government. If the contractor hired to provide the service meets certain benchmarks, the investment firm will get all its money back from the government. If the contractor exceeds the benchmarks, the firm gets a profit. If the project does not live up to the standards set by the government, the investment firm will only be paid back partially, losing some money.

Goldman Sachs is putting a $9.6 million loan into a program designed to lower recidivism rates among adolescent males at Rikers Island by 10 percent over the four-year life of the program. The funding will go to MDRC, a social services provider, which will design the program. If the plan succeeds, Goldman can make up to $2.1 million in profit. If it fails, the firm could lose up to $2.4 million.

The government will put at least $7 million into this effort no matter what happens. The point of social impact bonds is that they create an incentive for success and provide accountability for failure. This is an exciting and appealing idea in a time when most people believe that governments tend to be more wasteful, less efficient, and less accountable than private industries. The concept of social impact bonds took off fast, going from only being tried in Britain in 2010, to accounting for $100 million in President Barack Obama’s budget in 2012. The hope of social impact bonds is that they will increase the value of charitable and non-profit funds directed at assisting government programs.

On the flip side, some charities are concerned that these new arrangements will change the public’s expectations for how charitable and non-profit organizations operate. Though recidivism rates may be relatively easy to measure, the usefulness of many charity funds can’t be parsed so easily.

The fact that there is a level of accountability for this program on Rikers Island increased its chances of being approved and the goal of 10 percent recidivism seems attainable. The reality is that programs like this often have very good results because the baseline of service that the public feels comfortable funding is low enough that any significant increase in funding is likely to lead to positive change. The school industry, veteran care, and jails are all areas where U.S. citizens expect to lead the world because we have a strong moral belief in an essential American dedication to these causes.

Recidivism rates are movable because programs targeting specific cohorts of inmates have been highly successful in the past. Rikers Island has had these very programs. Getting Out and Staying Out is a program that lowered recidivism rates from 66 percent overall at Rikers to less than 10 percent for participants in the program. As of press time, 400 people have been through the program and released out into society since it started in 2004.